In 2021, the Central Bank of Nigeria embarked on the groundbreaking eNaira project, leading the charge as one of the pioneers in the world of Central Bank Digital Currencies (CBDCs).
This ambitious venture was driven by the desire to stay aligned with the global shift towards digital transformation, which has significantly revolutionized the concept of money.
Now, two years following the eNaira’s launch, the Central Bank shares valuable insights gleaned from this experience.
These insights shed light on the advantages and challenges encountered throughout the eNaira’s utilization period, offering a compelling case for the broader benefits of implementing a national CBDC, using the eNaira as an exemplary model.
Enhancing financial inclusion
One notable advantage of CBDCs is their potential to promote financial inclusivity by offering affordable and secure payment alternatives to individuals who are currently excluded from traditional banking services.
Despite the fact that existing policies implemented by the CBN have made significant strides in enhancing financial inclusivity, with a growth from 48.0 percent in 2008 to 64.1 percent in 2020, the introduction of the eNaira has the potential to further elevate these statistics.
By providing inexpensive, secure, and convenient payment solutions, the eNaira can effectively address the needs of unbanked and underserved populations.
Reducing cash processing costs
Nigeria’s cash-based economy incurs significant costs in managing currency circulation. The introduction of the eNaira is expected to align with the central bank’s cashless policy, thereby reducing expenses associated with cash management.
As early as December 2011, the CBN released a cashless policy aimed at reducing reliance on paper notes and promoting digital financial infrastructure.
This decision was driven by the fact that “Currency-in-Circulation in Nigeria grew at a 7.0 percent (cumulative average growth rate) in 2020, with cash management costs totaling ₦65.40 billion ($142.00 million) for a country with a GDP per capita of $2,097.10.”
In light of this, the CBN emphasizes that the eNaira is a critical step towards alleviating the cash management burden not only in Nigeria but also in other countries interested in pursuing similar measures.
Efficient welfare disbursements
According to the CBN, the eNaira is highly useful for the National Social Insurance Program (NSIP). This program enables the government to provide financial assistance to citizens during challenging economic periods and for various other purposes.
The CBN emphasized that the eNaira provides a reliable platform for the government to make direct and transparent welfare payments to eligible citizens. This digital currency also enhances monitoring and accountability measures.
Formalizing the economy
Another benefit stated by the apex bank is that using CBDCs will create a more formal economy, reducing the informal sector and making taxation easier for the government.
“In doing so, it can potentially bring more economic activity into the effective tax base, thereby increasing tax collections,” CBN said. “Over the years, successive governments have sought to address Nigeria’s current taxation problems with several reforms.”
Facilitating cross-border trade and remittances
CBN also noted that the eNaira can streamline cross-border payments, reducing costs and complexities associated with international trade and remittances.
It revealed that “with the average cost of sending remittances standing at 7.1 percent and 6.3 percent in Q1, 2021 for Nigeria and the world, respectively,” a CBDC can address this more efficiently.
As a CBDC, eNaira can simplify domestic digital payments by eliminating intermediaries and leveraging blockchain technology, leading to faster and cost-effective transactions.
CBN said this is notable in making settlement within the nation faster and better “eliminating or reducing multiple intermediaries and stepwise clearing and settlement processes required in domestic digital payments”.
Boosting economic growth
In general, it added that CBDC adoption, combined with blockchain technology, has the potential to significantly contribute to economic growth and innovation.
According to a recent study conducted by a Nigeria-based research organization funded by the UK, they highlighted the potential of CBDC and blockchain technology to substantially boost Nigeria’s GDP over the next decade, projecting a staggering increase of $29.00 billion.
To wrap things up, the CBN pointed out that the eNaira signifies a consequential stride towards a digital and inclusive financial future for Nigeria. Its objective is to tap into the potential advantages while tackling the accompanying risks and challenges head-on.